Q4FY23 Review: MRF: Margin recovery stronger than expected

4 May 2023 , 10:57 AM

MRF’s Q4 EBITDA beat IIFL’s estimate by 30% driven by stronger than expected improvement in margins. Margins expanded due to fall in key input costs (rubber, crude) and price hikes. In recent years, MRF’s margin lead over peers has come off sharply. This was a result of dilution in revenue mix, and fall in segment-level margins as MRF tried to stem market-share loss by delaying price hikes. Now that market-share loss has paused, MRF is increasing prices to make up for the shortfall versus peers. In view of the sharp recovery in margins, analysts at IIFL Capital Services have increased their margin assumptions, leading to EPS upgrade of 36% and 17% in FY24 and FY25, respectively.

Despite the beat, they have retained their Reduce rating on the stock as i) upcycle in tyre sector margins would last only one more quarter, and ii) the stock is expensive, relative to peers.

Q4 EBITDA beat by 30%

Revenue grew 10% YoY and 3% QoQ, in line with estimates. YoY revenue growth was driven by price hikes; volumes would be flat-to-down. Gross margin (GM) improved 490bps QoQ to 37.0% (340bps beat), due to price hikes and fall in input costs. EBITDA margin rose 480bps QoQ to 14.7% (330bps beat). Absolute EBITDA came in 30% above IIFL’s estimate while PAT beat by 48%.

MRF increasing prices with stability in market-share

In FY17, MRF’s EBITDA margin was 500bps and 800bps above Apollo and CEAT, respectively. Over the years, this margin advantage has slipped significantly. In Q3FY23, MRF was 300bps below Apollo and only 120bps above CEAT. Analysts at IIFL Capital Services believe this was a result of dilution in revenue mix, and fall in segment-level margins as MRF tried to stem market-share loss by delaying price hikes. Now that market-share loss has paused, MRF is increasing prices to make up for the shortfall versus peers.

Upgrade EPS estimates but retain Reduce

In view of the sharp recovery in margins, analysts at IIFL Capital Services have increased their margin assumptions. This leads to EPS upgrade of 36% and 17% in FY24 and FY25, respectively. Analysts at IIFL Capital Services retain their Reduce rating on the stock as i) they expect the upcycle in tyre sector margins to last only one more quarter, and ii) the stock is trading at a premium of 25% versus peers, even on upgraded earnings.